Image Scan Holdings Regulatory News (IGE)

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

4 December 2020

Image Scan Holdings plc

("Image Scan", the "Company" or the "Group")

PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2020

Image Scan (AIM: IGE), the specialist supplier of X-ray screening systems to the security and industrial inspection markets, today announces preliminary results for the year ended 30 September 2020.

HIGHLIGHTS

· Sales increased 50% to £3.5m (2019: £2.4m)

· Pre-tax trading profit of £113k (2019: Loss of £402k)

· Aftersales revenues increased by 50%

· Strong cash generation, yielding a year-end balance of £1.4m (2019: £640k)

· Sales of portable X-ray systems doubled

· A new cabinet X-ray system was launched

· A partnership agreement was signed with a major security technology company

· Strong cash flow due to excellent working capital management

Bill Mawer, Chairman and Chief Executive of Image Scan commented: "It is gratifying to be able to report a profit in the middle of such a difficult period for manufacturers around the world. The COVID-19 pandemic has impacted our customers, our supply chain and our staff. However, I am proud of the way the whole Company has pulled together through this period to keep the business operating and to be able to deliver a profit for the year that exceeded our earlier estimates.

The recent launch of the Axis-CXi cabinet X-ray machine is an exciting step forward for the Company and should bring new customers and new sources of revenue. With our strong cash position and our ambitious product development programme we look to emerge from the pandemic well-placed for the future 

-END-

For further information on the Company, please visit: www.ish.co.uk and for further information on its products, please visit: www.3dx-ray.com

About Image Scan Holdings plc

The core activity of the Group is the manufacture of portable X-ray systems for security and counter terrorism applications. The Group recently launched a cabinet X-ray machine and is replacing its Axis range of checkpoint X-ray systems with new machines developed with a partner. All these products are taken to market across the world through a strong network of international partners.

In addition, over the last fourteen years, Image Scan has developed and manufactured industrial X-ray inspection systems, the MDXi range. The primary market for these systems is in automotive emissions control where they are used for quality control inspection of catalytic converters and diesel particulate filters.

For further information on the Company, please visit: www.ish.co.uk - and for further information on its products, please visit: www.3dx-ray.com

CHAIRMANS STATEMENT

OVERVIEW

I am pleased to announce that the Group is reporting a profit after tax for its year ended 30 September 2020 of £137k compared with a loss last year of £367k. This result reflects a strong first half, building on a large portable X-ray order won at the end of the previous year, and a lower level of activity in the second half as COVID-19 led to a slowdown in new business. However, the Group has continued to receive orders, run its manufacturing site, and supported its customers throughout the pandemic. Additionally, careful management of costs and stock made the business strongly cash generative. Product development activity continued at near normal levels and led to the launch of a new cabinet X-ray system, while a partnership agreed with a security technology company will lead to further product launches.

FINANCIAL RESULTS

New orders received in the year declined under the influence of COVID-19 to £2.4m (2019: £3.9m), however, the strong order book brought forward from the prior year allowed sales of £3.5m (2019: £2.4m), a 50% increase year on year. Geographically the destinations for these sales were highly diverse and included customers in South America and Africa alongside more normal targets in the Middle East and Asia. Aftersales revenues, which consist primarily of service, spares and training, were up by nearly 50%, supported by valuable spares contracts for a nuclear screening system originally delivered in 2015.

Gross margins returned to more normal levels at 49% (2019: 54%) reflecting the balance of product mix towards portable X-ray. Overheads declined slightly to £1.6m, as the Company used the Government's Coronavirus Job Retention Scheme to support salaries during periods of reduced activity. The pre-tax trading profit for the year was £113k (2019: loss of £402k).  

The Company ended the period with an order book of £633k (2019: £1.7m) and a healthy year-end cash balance of £1.4m (2019: £640k). The strong bank balance represents cash generation of £769k (2019: reduction £142k), achieved in part by carefully trading out of the high stock holding reported at the end of the previous period. Stock has been managed tightly, particularly in the period of the pandemic, with a balance being struck between control of working capital and the need to offer favourable delivery times to customers. In the year, the Company took advantage of the Government's Bounce Back loan for £50k which will be repaid in FY2021.

Overall net assets at the year-end increased to £1.4m (2019: 1.3m) and with year- end cash balances of £1.4m this leaves the Group in a strong financial position to both weather the pandemic and continue its investment in its products and markets.

BUSINESS REVIEW

The business started the year with a strong order book of £1.7m, which included a large order valued at over £800k for portable X-ray systems from a European government customer. That order was manufactured in the first quarter and delivered in the second quarter through our local partner. The production team was also kept busy by a succession of smaller portable X-ray orders from customers in a wide range of geographies, contributing to a strong and profitable first half. The rate of portable X-ray sales in the second half declined, but the figures for the full year were pleasing, showing a doubling of unit sales numbers over FY2019.

The sales process for portable X-ray systems typically incudes trade shows, customer demonstrations and live trials, often conducted with our overseas partners. COVID-19 has significantly impacted this activity, but our team has successfully migrated to online campaigning. This is a multi-platform effort, and includes the creation of new video material, the ability to conduct online demonstrations where the customer is able to control the equipment remotely, and our first attendance at an online security trade show. We are creating a permanent exhibition area in our facility to support both visits and online demonstrations.

The R&D team continued to add features to our portable X-ray products and expand the range of peripheral options available. An example of this, released in the period, is a hand-held trigger which allows our portable X-ray generators to be used with X-ray film, without the need to set up a detector panel or laptop, an important option for some bomb scenarios. Our US based sales consultant, an experienced former bomb technician, has created detailed instruction videos to support this and other new developments. Bomb technician training courses were carried out in the US under the 3DX-Ray name for the first time.

The new Axis-CXi cabinet X-ray system, launched at an online trade show just after the year end, presents a level of sophistication in image capture and processing not previously available in this type of screening system. Use of many components and software modules from the portable X-ray systems made this an efficient development process and will help in manufacturing and customer support. The team has also made good progress on a new conveyor X-ray system based on technology from our technology partner. Both project teams have included Bluefrog Design, an award-winning industrial design company based in Leicester, who have helped create an impactful external design for machines.

New measurement techniques for the MDXi range of industrial scanners were taken to market during the year and, shortly after the year end, this activity led to a software contract to finalise the development of the techniques and implement them on deployed MDXi inspection systems. This demonstrates the close working relationships we maintain with our key industrial customers, important for our continued success in this profitable niche.

ADAPTING THE OPERATION OF THE BUSINESS

While the focus of operational improvement efforts in the prior year had been on-time delivery and quality, in FY2020 the emphasis has been on adapting to the challenging demands of the COVID-19 pandemic. The manufacturing space has been reorganised to create social distancing, new controls have been introduced and access to software tools for remote product development has been improved. Sales and administration functions have worked almost entirely from home. Our customer support staff have had to re-think how they operate, increasing remote access to deployed systems and, in some cases, finding and training local support partners.

We have worked hard to maintain the atmosphere of co-operative teamwork that existed when the whole team was working in one place. The business will continue to adapt and improve in this new and challenging environment.

OUR STRATEGY

The Group's short-term strategy is to pursue organic growth through expansion of the product range, selling these products in a wider range of market segments and filling in gaps in its geographic reach. The Group seeks to play in profitable niche security segments for which it can create highly differentiated products that it can take to market at good margins. The Group recognises that as a relatively small business it can only support a limited range of technologies and it is therefore creating an underlying toolkit as the core of a broad range of its products. The new Axis-CXi is a good example of this approach, using detectors and software from the portable X-ray range.

Where it is not cost-effective to entirely develop a product ourselves, we will look to partner with other companies, just as we have done in this year. This allows us to further expand the product range, while keeping our own R&D investment at affordable levels.

The Group's core security segment is the "bomb squad" market to whom it sells its portable X-ray systems. We will continue to invest in this sector, broadening and strengthening our offer to customers. The new cabinet X-ray system and planned conveyor X-ray systems create new opportunities in building security, mail screening, prisons and sports stadia. X-ray equipment in these markets must, by law, be serviced regularly allowing the Group to increase its recurring service and support revenue as new systems are deployed.

In industrial screening, we will look for customer investment to enhance the MDXi product range and recently won a contract to develop sophisticated new measurement methods for inspection of catalytic converters. We will continue to look for new customers in this sector, while selectively investigating opportunities in the broader industrial X-ray market.

The Board's longer-term ambition to increase the critical mass of the business through carefully selected acquisitions remains. However, we recognise that the opportunities will be limited by the current low share price and market capitalisation.

COVID-19 AND THE OUTLOOK FOR IMAGE SCAN

The Covid-19 pandemic has impacted the Group's customers, its supply chain and its staff. However, the Group created a Covid-secure working environment at its facility and continued manufacturing operations onsite. R&D has continued, with staff working both onsite and from home, and sales and administrative staff have mainly worked from home. Provided our staff remain healthy, this method of operation will continue for as long as Government guidance recommends it.

As our international government customers have tended to focus effort and budget on healthcare, some larger government procurements of security systems have been delayed. Nevertheless, we have continued to receive a steady stream of smaller orders and are optimistic that this will continue. By continuing to invest in the portable X-ray product range we expect to be well positioned when procurement returns to a more normal level. We aim to make the first sales of our new cabinet X-ray systems in the current financial period and expect growth beyond that. Accessing broader groups of customers with this and other new products will add new revenue streams that make us less dependent on the highly competitive portable X-ray market.

It is hard to anticipate when spending on security systems might return to more normal levels, but we are confident that our expanded product range and wide market access puts us in a good position to benefit when that happens.

The Group's industrial sales in FY2020 were consistent with previous years, but the wider automotive sector, which includes our industrial customers, has been severely hit by the pandemic, as sales across that sector are estimated to be 20% down in 2020 (Source IHS Markit). Our customers are reducing activity in key plants and we expect a low level of new system acquisitions over the next 12 months. It is anticipated that recovery in the car market will be strongest in China, where growth was particularly impressive before the pandemic, and we would expect to benefit as manufacturing capacity is further increased there.

The impact of Brexit on the business is hard to estimate with any accuracy but we have considered both direct and indirect effects. A relatively small part of our turnover comes from EU customers so, even if there is a tendency by those customers to procure from within the EU, the impact should be small. Our only significant EU supplier has already been replaced by an alternative source within the UK. The most likely indirect impact is a general slow-down of customs processes for incoming parts and outgoing finished goods, but we anticipate that this will be manageable. The Board reviews potential impacts of Brexit on the business every month.

In summary, we have entered the new financial year with continuing economic and political uncertainties. Without the benefit of exceptionally strong order book going into last year and the current delays in the placing of large orders, we therefore expect a challenging year ahead. However, our strong cash balance gives us confidence that we can weather these uncertainties and our expanded product range a wide market access means we are well-placed to benefit as and when activity levels return to more normal levels.

In the longer term, the Board continues to believe that a blend of organic and acquisition growth is the best way to deliver shareholder value, the greater scale will provide both protection from market shocks and stronger amortisation of the relatively high fixed costs associated with a stock market listing.

STAFF

Our staff have worked exceptionally hard to maintain the performance of the business through this difficult period and the Board is grateful for their efforts.

William Mawer

CHAIRMAN

3 December 2020

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

Notes to the preliminary statement1. Basis of preparationThe financial information set out above does not constitute the Company's statutory accounts for the years ended 30 September 2020 and 30 September 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 498 of the Companies Act 2006.

2. IFRS 2 'Share-based payments'Operating expenses includes a charge of £3,877 (2019: £5,364) after valuation of the Group's employee share options schemes in accordance with IFRS 2 'Share-based payments. Under this standard, the fair value of the options at the grant date is spread over the vesting period. These items have been added back in the statement of changes in equity.

3. Earnings per share

Diluted profit per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of dilutive potential ordinary shares. The Company's dilutive potential ordinary shares are shares issued under the Company's Enterprise Management Incentive (EMI) scheme and options issued under the Company's Unapproved scheme.